Country Focus: Singapore: From Recovery to Sustained Economic Expansion

International Monetary Fund. External Relations Dept.
Published Date:
June 2006
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In the past decade, Singapore’s economy has successfully weathered a series of external shocks and heightened regional competition—thanks, in large part, to supportive macroeconomic policies and structural reforms. The current economic momentum remains strong, but rising inflation underscores the importance of maintaining an appropriate macroeconomic policy mix. Intensifying regional competition will mean continuing challenges, thus underscoring the need for Singapore to keep structural reform high on its policy agenda.

In the past decade, Singapore’s economy was hit by a series of adverse external shocks: the Asian crisis in 1997-98, the bursting of the technology bubble in 2001, and the Severe Acute Respiratory Syndrome (SARS) shock in early 2003. The country’s economy, however, managed to ride out these shocks and recovered relatively quickly (see chart, this page). This resilience owes much to sound economic fundamentals and the government’s supportive monetary and fiscal policies.

Singapore’s monetary policy—which is based on the management of a trade-weighted exchange rate index (TWI) within an undisclosed band—has as its primary objective maintaining price stability. The Monetary Authority of Singapore (MAS) responded to the macroeconomic shocks over the past decade by allowing the TWI to depreciate. On the fiscal side, the government halved the public saving rate (measured in percent of GDP) between 1997 and 2005.

Over this same period, Singapore saw its competitiveness tested by the rise of low-cost economies in the region, notably China and India. Their emergence had a particular impact on Singapore’s electronics sector, which currently accounts for about one-third of GDP. With its higher labor costs, Singapore had a particularly difficult time competing in the low-tech segment.

To respond to these competitiveness pressures, the authorities geared up structural reforms focused on increasing wage and labor market flexibility; liberalizing the banking, telecom, and utility sectors; enhancing the financial regulatory and supervisory framework; and negotiating free trade agreements with major trading partners. Fiscal policy was also used effectively to strengthen competitiveness. The authorities lowered the corporate income tax rate and provided tax incentives to encourage new growth sectors (including pharmaceuticals). In addition, private companies took steps to restructure—moving their products up the quality ladder, relocating parts of their operations to low-cost economies, and more generally diversifying their business base by investing throughout Asia and penetrating new markets.

Safeguarding the momentum

In 2005, the economy grew at a brisk 6.4 percent (year on year). Domestic demand growth slowed, but external demand strengthened—especially for pharmaceuticals and oil rigs and, toward the end of the year, for electronics. The growth momentum slowed somewhat in the first quarter of 2006 (see chart, page 173) but remained buoyant at a 6.8 percent (annualized quarter on quarter).

Prospects for the near term are favorable. Growth is projected to remain strong in 2006—reaching 5½–6 percent—with domestic demand, especially investment, likely to make a larger contribution to economic activity. Overall, risks to this outlook are broadly balanced. On the upside, investment could rise more sharply if high corporate savings unwind more rapidly in response to favorable economic conditions. Stronger global demand for information technology could provide an additional impetus to growth. On the downside, the range of risks include higher oil prices, which could dampen spending by eating into disposable incomes; the potential for a disorderly unwinding of global imbalances, which would seriously dampen activity, given the openness of Singapore’s economy; and the possibility of terrorist attacks or a bird flu pandemic, which could negatively affect investor sentiment.

When economic growth recovered after the SARS shock, the MAS in April 2004 started to tighten monetary policy, targeting a gradual appreciation of the TWI. This stance remains appropriate, given the little slack currently in the economy. With the labor market tightening and real wages set to rise, these developments—along with high energy prices—could increase inflationary pressures. Although short-term interest rates have increased in recent months, and the MAS has allowed additional appreciation of the TWI, monetary policy may need to be further tightened if inflationary pressures increase. Indeed, the authorities should stand ready to take full advantage of the flexibility afforded by the monetary framework and adjust the exchange rate as needed to safeguard the monetary objective.

Weathering shocks

Thanks to supportive macroeconomic policies and effective structural reforms, Singapore has successfully weathered a series of external shocks and intensifying regional competition.


Note: ASEAN-4 = Indonesia, Malaysia, Philippines, and Thailand.

Data: IMF, APDCORE database and staff estimates.

Fiscal policy, on the other hand, is expansionary. Singapore’s FY 2006/07 budget provides for an increase in social spending in line with the government’s strategy to help low-income families and low-skilled workers through targeted assistance. Under this initiative, the government will provide broad means-tested transfers to households, income supplements for low-wage workers, and assistance in meeting rising health care costs and utility bills. The budget also includes a number of measures designed to upgrade and further restructure the economy, including more spending on research and development. The country’s very large fiscal reserves provide ample scope to undertake these initiatives, which will also contribute (albeit only marginally) to a reduction in global imbalances. However, the expansionary stance adds somewhat to demand pressures, underscoring the need for monetary policy to remain vigilant to ensure price stability.

Increasing competition… will continue to pose a challenge for Singapore’s economy and will mean that the government will need to keep structural reform high on the agenda.

Buoyant growth momentum

Strong external demand propelled economic growth in 2005 and early 2006, although the momentum recently eased somewhat.


Note: Annualized quarter-on-quarter data show what the annual growth rate will be if the quarterly growth rate is maintained for a year. As such, it is a good indicator of the current economic momentum.

Data: IMF, APDCORE database and staff estimates.

Sustaining the economic expansion

Increasing competition from other economies in the region, and, more generally, further globalization, will continue to pose a challenge for Singapore’s economy and will mean that the government will need to keep structural reform high on the agenda. Reforms should also pay due attention to advancing targeted social programs and increasing retirement incomes.

To respond to these challenges, a government-sponsored Economic Review Committee in early 2003 recommended a number of measures intended to enhance competitiveness and entrepreneurship and diversify the economy. The committee specifically suggested that Singapore shift from direct to indirect taxation, promote the growth of its service sector, reform its compulsory Central Provident Fund savings scheme, divest nonstrategic government-linked companies, foster greater labor mark flexibility, and strengthen job training pro-rams. The government has already implemented many of these recommendations.

More recently, the authorities have announced additional plans to strengthen the manufacturing sector by promoting integrated supply chain systems, developing new growth sectors, improving education and skills training, and increasing investment in research and development. Further to this, however, the authorities should explore the scope for accelerated divestment of nonstrategic government-linked companies to encourage private sector entrepreneurship.

Moreover, large fiscal reserves continue to provide ample scope to pursue targeted social programs that would assist low-income families. Such programs could be designed to enhance the social safety net without labor market distortions and could support private consumption by reducing the need for precautionary savings. Redesigning the Central Provident Fund system, including permitting greater flexibility and risk-return options, could help increase retirement income and thus allow higher consumption for retirees or lower savings ahead of retirement.

Leif Lybecker Eskesen

IMF Asian and Pacific Department

Copies of IMF Country Report 06/150, Singapore: 2005 Article IV Consultation-Staff Report, are available for $15.00 each from Publication Services. See page 176 for ordering information. The full text of the report is also available on the IMF’s website (

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